Internet electronic commerce developments have fuelled the need for foreign exchange transactions involving small sums for a number of markets, including retail markets. Websites provide an opportunity for world wide marketing of products. These may be selected and purchased online, often from a retailer or other business based in a country foreign to the customer. In retail transactions purchasing is often carried out by means of a credit or debit card transaction. The customer sees a price for a product on a foreign website expressed in a foreign currency, and the customer purchases the goods by providing credit card details to the website. The credit card scheme, acting on behalf of both the card issuer and the merchant acquirer carries out a foreign exchange transaction as part of the purchase, in order to arrive at a figure in the customer's home currency for the foreign currency purchase. This home currency amount is then applied to the customer's credit card or debit card account by the card issuing financial institution.
The customer does not actually know what the charge in the home currency will be at the time of purchase. He/she simply waits until it appears on his/her credit card statement. Naturally he/she could estimate what the exchange rate applied may be; for example with reference to published tourist rates, or on the basis of past experience.
The foreign exchange transaction generates a significant income stream for the credit card-issuing bank. This is because the bank applies a retail foreign exchange rate to the customer's transaction, but can itself rely upon a wholesale foreign exchange rate which the bank obtains in processing a transaction.
The bank, but not the customer, may be able to take advantage of the wholesale foreign exchange markets by agglomerating a plurality of individual foreign exchange transactions of the type described above into a wholesale transaction. The effect to the bank may be a further profit arising from the difference between the retail foreign exchange rate offered to the customer and the wholesale rate available to the bank. In the case of a credit card transaction this is in addition to the profit generated by the offering of credit to the customer in the normal manner of a credit card.
Of course, trans-border transactions are not limited to retail credit and debit card payments. Other payment methods may be used, such as direct currency transfer from one bank account to another foreign bank account. Typically however a foreign exchange transaction is conducted in the home country of the customer and the payment is transferred in the appropriate foreign currency.
A problem with this mechanism is that where a transaction involves relatively low value payments, the customer will not be able to access wholesale foreign exchange rates, which will usually only be available on very large value transactions. Hence low value foreign exchange transactions are typically inefficient, and act as a constraint to cross border trade. This is particularly true of the Internet market, which provides a ready mechanism for cross border transactions such as retail sales, foreign share dealing, fund transfers etc.
Cross border foreign exchange transactions are not limited to e-commerce, and the present invention seeks to improve the efficiency of any transaction involving the purchase by a customer in one currency of goods or services offered in another currency, in which the supplier is to be paid in its home currency.
Current transaction processes penalise the payee by transferring the foreign exchange cost burden to the payee. In the example of a credit card purchase, the customer obtains a relatively unfavourable exchange rate, and may not know the actual foreign exchange rate which will be applied, and therefore the actual cost of the goods or service he/purchases until the transaction appears on a statement of account. He/she could of course contact their bank to ask for the instantaneous exchange rate, but this requires him/her to go to the effort of making contact, and in addition conducting a calculation to obtain the actual cost. For low value transactions the consumer is most unlikely to bother, and simply puts up with the inconvenience of not seeing the actual cost.
Trans-border payments involving foreign exchange are often made by credit card. In effecting any credit card payment there are two distinct elements to a payment; issue and acquisition. The credit/debit card industry is divided along two distinct lines. These are card issuing and card acquiring. Cards are available under different “schemes”, such as Visa, Mastercard, American Express (all trade names). Each of these schemes imposes rules which ensure the acceptability of the cards by all parties.
Card issuing is undertaken by a wide range of banks and non-bank entities. The Card issuers issue cards to the cardholder and have responsibility for providing credit, payment and accounting services. For example Royal Bank of Scotland (trade name) issues cards under the Mastercard scheme.
Merchant acquirers provide the merchants who sell products and services with the infrastructure for accepting card based payments. Merchant acquisition is a highly commoditised business that is dominated by a small number of global providers. For example RBS Card Services is one of the the largest multi-currency global merchant acquirers. It has the capability to accept card transactions in any foreign currency for settlement in about 25 different currencies according to the needs of individual merchants.
Currently the management of foreign exchange currency exposure is based upon exchange rates quoted by the various card schemes through which settlement is managed. Typically currency exchange rates which are three days old are used to settle transactions. This has in the past not been too much of a problem to the merchant acquirers as the margins applied to the transactions are high and capable of absorbing fluctuations over that time period. However, as the volume of transactions has increased the benefits of a more efficient system have become apparent.
Another area where foreign exchange transactions commonly take place is the electronic transfer of money by individuals in one country to persons in another country. Migrant workers may work in one country to support a family in another country. Currently an exchange rate transaction is carried out by the money wirer on the individual sum transferred, so that the money reaches the foreign destination having already been exchanged into the appropriate foreign currency. Payment may be made to the wiring agent by cash or card, but the foreign exchange transaction is conducted by the wiring agent. This may be at an unfavourable rate, and may also be subject to a fixed surcharge.
Other foreign exchange transactions may be manually conducted, involving for physical foreign exchange instruments, such as cash or cheques. This is slow and also acts as a brake on foreign exchange transactions.